IT IS the Spencer family's own personal bedtime story. Princess Forget-me-not and Prince Lily of the Valley, the most beautiful of all the flowers, meet at a ball and fall in love. They have never met before, because she is a summer flower, and he of the spring. And there lies their tragedy: nature has not meant them to be lovers. After the ball, as the end of night approaches, they go down to the edge of a tranquil lake and sail to Forget-me-not's palace, carved in a water-lily.

In the east there was a faint lilac tinge, and the trees around the lake all shivered ...

"Go, go," said the Forget-me-not. "In a moment the Dawn will pull aside the grey curtains with the tips of her pink fingers, and you will fade. Go, and come again next year."

"I couldn't live a whole year without you," he said.

"You will sleep," said the Forget-me-not.

"I should dream of you and be so unhappy. I will stay."

So he stayed, and they nestled close to each other in the warm gold heart of the Water-lily. And then the Dawn gently pulled away the curtains of Night, and the sky blushed, and the Morning Star flickered and went out. The Lily of the Valley never went away, and no one saw him or the Forget- me-not again ...

This is an extract from The Story of Forget-me-not and Lily of the Valley, a small, green, much-prized children's book written by the novelist and poet Maurice Baring, whose sister Margaret was Diana, Princess of Wales's great-grandmother. It is now out of print and a valuable collector's item (leading second-hand bookshops in London keep waiting-lists of people willing to pay over pounds 100 for a copy). But a relative remembers there was a copy of the book in the night nursery at Althorp in the Sixties. It is tempting to wonder how large a part it played in Diana's childhood; especially when considering its uncanny echoes, not only of the emotional context of public mourning for her death a year ago - a fairy tale robbed of a talismanic leading character - but also of that mourning's extraordinary floral symbolism, the flowers heaped first in the parks and streets of London, and then on Diana's lake- island grave at Althorp.

The book is part of the Spencers' private language, loved by four generations of the family and read at Althorp throughout the century. It was first published, privately, in 1905, with the first general illustrated edition appearing in 1909. In his autobiography, The Puppet Show of Memory (1922), Baring says that he was inspired to write it by a different story on the same theme that he, Margaret, and their brothers and sisters were told in the nursery by their French governess, Cherie Gauvret. Cherie's Le Prince Muguet et La Princesse Myosotis was privately printed in French in the 1880s by Baring's mother. A copy exists, illuminated by the child Maurice with watercolour illustrations of its flower, fairy and butterfly characters. In Forget-me-not and Lily of the Valley the adult Baring was not just refashioning, but re-stating, a favourite family fairy tale, passing on an oral tradition through the printed word. There are close parallels in the casts and settings of the two stories. "Myosotis lived in a palace," Cherie's story opens, "in the middle of a beautiful lake, built in a water-lily as white as snow, with diamonds and golden columns ... "

The charm of Forget-me-not and Lily of the Valley lies as much in its illustrations - beautifully coloured images of flowers with human characteristics - as in its writing. They were done by Countess Sophie Benckendorff, whom Baring had met in 1901. Through her he came to know Russia - he made his name as a writer on Russia and the Russians in the years leading up to the First World War; on her he depended as a muse for the mature novels of the 1920s which are his main claim to literary recognition. And to Baring it was crucial that these pictures should be done by someone who really understood his writing rather than by a slick professional illustrator.

Benckendorff's pictures have an immediate gentle charm. But they gain spice when you know that some are also caricatures of members of a literate upper-class circle known as the Souls, which had its heyday from the 1890s up until the First World War. Maurice and his sister Margaret were on the fringes of the Souls, and as such introduced Countess Benckendorff to them when she settled in Britain. In the drawings, Baring himself is the Lizard who arranges the Flower Ball, the Liberal politician A J Balfour the Mayor who persuades the sky to stop raining, Sophie Benckendorff the Gardenia, looking on at the young dancers through lorgnettes. Most pointed is the scene where Lady Desborough (a famous and fascinating hostess of the day and the undisputed queen of the Souls), as the Pink, sits under a toadstool with one of her official lovers, Evan Charteris (the Violet) - while Maurice and Margaret's eldest brother John Revelstoke (the Yellow Tulip), Ettie Desborough's other official lover whom she saw on a separate, strictly controlled timetable, looks on askance, arms folded.

The special qualities of the book owe not a little to the Baring children's halcyon, vivid childhood in the 1870s and 1880s. Both parents - Edward Baring, the head of Barings bank and first Lord Revelstoke, and Emily Bulteel, a first-rate amateur musician and the grand-daughter of the Reform Bill prime minister Lord Grey - emerge from their children's memoirs as cultivated, warm-hearted figures, who engaged with and encouraged their sons' and daughters' talents. The combination of the Revelstokes' culti-vation and literate tastes with the fruits of a banking fortune produced a picturesque, diverting family life at Membland, the family estate on a beautiful stretch of rocky Devon coastline (the same part of the coast where Diana and her siblings would holiday years later).

The children's principal figure of fantasy was the then Princess of Wales, Princess Alexandra, who was as much a subject of public fascination as Diana nearly a century later. To Maurice as a child, Alexandra "was like the queen of a fairy tale who had strayed by chance into the world of mortals". When staying at their London house in Charles Street, Mayfair, Cherie the governess would dash the children across the street to catch a glimpse of Alexandra passing in her carriage. The Princess would sometimes come to Charles Street to hear music played, by Clara Schumann, Mme Neruda and the other great musicians of the time. "Life was like a fairy tale," Maurice wrote in his autobiography, "that seemed almost too good to be true." For George Bernard Shaw, reading these memoirs "completely upset my belief that happiness is thrown away on children because they are incapable of it".

When she married in 1887, the 18-year-old Margaret Baring, Diana's great-grandmother, brought this happiness into the life of Bobbie Spencer, later the sixth Earl Spencer, who had been brought up in a chilly atmosphere by a widowed mother. To the worldly it was a brilliant match: Bobbie, the heir to the honours and treasures of the Spencer family; Margaret, the daughter of the head of one of Europe's great banking houses, whose parents gave her wedding presents - a Stradivarius violin of the best period, diamond bracelets and a diamond tiara - that were tasteful but also splendid. A heroic child actress, an excellent violinist - well worth her Stradivarius - and an unsparing musical critic, Margaret was adored by her brothers and sisters, and consistently the most exciting member of the family, the one most likely to be made into the heroine of a fairy tale herself.

She and Bobbie lived at Dallington, a fine 18th-century house near Northampton, which they made something of a home from home for members of her family. They played violin sonatas together; he, the rising politician - created Viscount Althorp in his own right - helped the schoolboy Maurice prepare for his debates at Eton; she covered her sitting-room sofas with the William Morris fabrics her mother had favoured for Membland. The sympathetic Margaret enchanted the literary critic Edmund Gosse, while for Blanche Warre Cornish, an intellectual member of the Souls circle, she had "the atmosphere of a summer's day".

Margaret's summer's day came to an end in 1906, when, weakened by influenza, she died following the birth of her sixth child.She was only 38. "It was a great tragedy," Margaret Douglas-Home (that same sixth child) wrote in her 1994 memoir A Spencer Childhood. "None of her children ever recovered from this, or ceased to miss her." A golden age turned to an age of mourning.

There were no Spencer cousins, and the Baring brothers and sisters rallied around the stricken Bobbie. Maurice remained always on call, the adored bachelor uncle and at times paterfamilias. He died in 1945, but his example as a journalist and writer has been kept alive in the family. So much so that when Diana Spencer was married to the Prince of Wales in 1981, one of her cousins, Charles Douglas-Home, was editing the Times, then the paper of the Establishment, while another, Richard Ingrams, was editing Private Eye, the Establishment's scourge. And at the time, Diana's great- aunt Margaret Douglas-Home was anxious that a complete set of Maurice Baring's works should be found to give to the Prince of Wales to show him exactly what sort of family he was marrying into - one that gave a special place of honour to the charms of Forget-me-not and Lily of the Valley.